Section 1: Capital Budgeting (60 marks) Keener Clothiers Inc. is considering investing $2m in an automatic sewing machine to produce a newly designed line of dresses. The dresses are priced to sell at $200 each. Management expect to sell 12,000 dresses per year for six years, which is the expected life of this sewing machine. There is, however, some uncertainty about the production costs associated with the new machine. The Production Department has estimated operating costs at 70% of revenues, but senior management realises that this figure could turn out to be as low as 65% or as high as 75% of revenues. The new machine is depreciated by straight line method to have a book value of zero at the end of 6 years. The machine will have an estimated salvage value of $125,000 at the end of six years. Keener's cost of capital is 14% and its corporate tax rate is 35%. Using an excel spreadsheet (copies required for each solution), carry out the following calculations: a) Calculate the NPV for this project using the Production Department's operating costs. (15 marks for set up and 5 marks for correct answer = 20 marks) b) Establish the sensitivity of this NPV to variations in operating costs by calculating both the worst case and best case NPV values. (5 marks each = 10 marks)